Deeb Co. records all sales using the installment method of accounting. Installment sales contracts call for 36 equal monthly cash payments. According to the FASB’s conceptual framework, the amount of deferred gross profit relating to collections 12 months beyond the balance sheet date should be reported in the
A. Current liability section as a deferred revenue.
B. Current asset section as a contra account.
C. Noncurrent asset section as a contra account.
D. Noncurrent liability section as a deferred revenue.
Answer:B
B is corrent. Per SFAC 6, deferred gross profit on installment sales is conceptually an asset valuation (i.e., a reduction of an asset). Thus, it must appear in the asset section. The term "current assets" is used to designate cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. In this case, the question states that "all" sales are collected over 36 months and hence the operating cycle is 36 months. Therefore, the deferred gross profit should be reported in the current asset section of the balance sheet.
A is incorrect. Per SFAC 6, deferred gross profit on installment sales is conceptually an asset valuation (i.e., a reduction of an asset). Thus, it must appear in the asset section. The term "current assets" is used to designate cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. In this case, the question states that "all" sales are collected over 36 months and hence the operating cycle is 36 months. Therefore, the deferred gross profit should be reported in the current asset section of the balance sheet.
A is incorrect. Per SFAC 6, deferred gross profit on installment sales is conceptually an asset valuation (i.e., a reduction of an asset). Thus, it must appear in the asset section. The term "current assets" is used to designate cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. In this case, the question states that "all" sales are collected over 36 months and hence the operating cycle is 36 months. Therefore, the deferred gross profit should be reported in the current asset section of the balance sheet.
D is incorrect. Per SFAC 6, deferred gross profit on installment sales is conceptually an asset valuation (i.e., a reduction of an asset). Thus, it must appear in the asset section. The term "current assets" is used to designate cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. In this case, the question states that "all" sales are collected over 36 months and hence the operating cycle is 36 months. Therefore, the deferred gross profit should be reported in the current asset section of the balance sheet.
